The state of California yesterday unveiled an elaborate plan to cut pollution to 1990 levels within 12 years, taking on the fight against climate change in the wake of inaction from the Bush administration.

California regulators aim to force companies into either capping carbon emissions or buying permits from cleaner competitors that allow them to exceed the limits.

The system would resemble the "cap-and-trade" pollution reduction scheme that was defeated in Congress this month.

"This is by far the most significant step yet in California's effort to fill the void that's left by the absence of a national policy," Mary Nichols, chairwoman of the state air resources board, told local reporters yesterday.

The California plan, devised in response to the anti-pollution law signed in 2006 by governor Arnold Schwarzenegger, exceeds any climate change measure previously offered by US states or cities.

The standard for electricity derived from renewable sources would be hiked from 20% to 33%. Appliances would become more energy-efficient and new construction more sustainable.

But the air resources board has yet to complete a detailed economic analysis of its proposal, causing consternation among business groups that believe the new environmental rules are too costly and risky.

"You certainly do not want to have policies that end up reducing consumers' ability to drive from A to B, heat and cool their home or turn their lights on," Catherine Reheis-Boyd, chief operating officer for the Western States Petroleum Association, told the Associated Press.

Moreover, California residents may have to pick up the slack through an overall carbon tax if emissions reductions in the corporate sector do not meet the state's targets.

Nichols described the carbon tax as "a backstop", but a political backlash would likely result if it were imposed by the Schwarzenegger administration.

The total value of California emissions credits to businesses that trade them could eventually exceed $3bn, providing a powerful economic incentive but worrying local Democrats who have recommended a less market-based approach.

The California plan is reportedly based on the findings of Lord Stern of Brentford in his landmark 2006 study on the economic effects of fighting climate change.

Stern said at the time that the world's economies would need to spend 1% of their gross domestic product on cutting pollution – but he doubled that prediction just this week to 2%.

Although Lord Stern's original 1% estimate appears small, that level of climate spending would amount to about £14bn per year in the UK and $17bn in California.